A Massachusetts man pled guilty to fraud and embezzlement from the metal fabrication business for which he was part owner and chief financial officer (CFO). A U.S. district judge sentenced him to two years in prison and ordered him to pay $1,360,000 in restitution to the company, as well as $342,000 to the IRS.

Investigators from the IRS and the FBI found that the CFO had complete control of the corporation's financial activities, including maintaining financial account books.

For a period of nine years, the CFO wrote checks to himself or for personal expenses, then recorded them as business expenses. He also provided false information to the accountant who prepared the corporation's tax filings. As a result, the S-corporation's reported net income, as well as the owner's personal income, was fraudulently lower than it should have been.

Corporate filings show the firm removed the man as a director in 2015. "Man gets jail, $1.7M in fines in embezzlement scheme at Franklin company" Franklin.wickedlocal.com (Jun. 05, 2019).

Commentary and Checklist

What makes the above matter unusual is that the embezzlement was committed by a co-owner. More than likely, the other owner felt he or she could trust the co-owner because he had a stake in the organization. However, the thief must not had felt that his stake was large enough and wanted more.

Requiring strict adherence to detailed and comprehensive financial accounting procedures, even for co-owners, is a must for organizations. At the very least such measures can help organizations avoid large financial losses associated with the type of long-term theft.

It is always best to set up multiple levels of financial oversight right from the beginning, but it is also important to conduct periodic reviews of how expenses are paid and accounts are reconciled. Organizations often fall into a pattern of letting oversight slip. After a time, regardless of how operations were initially structured, one person may acquire complete control of most financial transactions.

Here are several general control practices that can reduce your risk of embezzlement and fraud:

Divide financial transaction duties between several employees. For example, one employee is responsible for writing checks, while another (or preferably two others) actually sign the checks.

For smaller organizations with limited staff, critical tasks should be shared between two or more employees to achieve similar oversight.

Be sure access to checks, petty cash, accounting software, etc. is limited to only those who need it.

Accept only standardized documents for invoices, expense reports, supply requests, etc. Make it clear that no money will be disbursed without appropriate paperwork.

Set up multiple levels of authorization for financial transactions. Your level of control increases when transactions are routinely evaluated and approved.

Make sure all employees, including upper management, understand the financial control policies and procedures, and that everyone is required to strictly follow them, regardless of their position in the organization.

Periodically hire an external forensic professional to carry out an audit of all financial operations.